FX trading is always priced in pairs between two different types of currencies. When you make a trade, you have to buy one stock and sell another at the same time. If you want to exit the trade, you must buy/sell the opposite position. For example, when you think the price of the Euro is going to rise against the US Dollar. In order for you to enter FX trading, you will have to buy Euros and sell US Dollars.
If you want to leave
FX trading, you will have to sell Euros and buy back US Dollars. You will be hoping that you were right in your guess and that the exchange rate for EU/USD has actually risen, which means that you will get more Euros back than when you bought them, which is how you will make a profit from FX trading.
These days just about every FX trading broker is claiming to have the tightest spreads in the industry. But marketing does have the ability to be deceiving. The topic of spreads in the FX trading spot market is very complicated and often not easy to understand. However, nothing affects your FX trading profitability more.
First of all in order to understand the FX trading spread, you need to know what it is. A spread is the difference between the ask price (the price you buy at) and the bid price (the price you sell at) that is quoted in the pips. If the quote between EUR/USD at a given moment is 1.2222/4, then the spread equals 2 pips. If the quote is 1.22225/40, then the FX trading spread is going to equal 1.5 pips.
The FX trading spread is how brokers make their money. Wider FX trading spreads will result in a higher asking price and a lower bid price. The consequence to this is that you have to pay more when you buy and get less when you sell, which makes it more difficult to realize a profit.
FX trading Brokers generally don’t earn the full spread, especially when they hedge client positions. The FX trading spread helps to compensate for the market maker for taking on risk from the time it starts a client trade to when the broker's net exposure is hedged (which could possibly be at a different price).
FX trading Spreads are important because they affect the return on your FX trading strategy in a big way. As a trader, your sole interest is buying low and selling high (like stocks and commodities trading). Wider spreads means buying higher and having to sell lower. A half-pip lower spread doesn't necessarily sound like much, but it can easily mean the difference between a profitable
FX trading strategy and one that isn’t profitable.
